CALGARY -- Canada's known natural gas reserves continue to decline even though a record number of wells were drilled in 2003, the energy industry announced Thursday.

In its annual estimate of energy reserves, the Canadian Association of Petroleum Producers said natural gas reserves declined by 2.5 trillion cubic feet by the end of last year, to 56.6 trillion cubic feet. A major factor in the decline was a decision by Alberta's energy regulator to lower the gas estimates by 7.5 trillion cubic feet for thousands of small single-well pools that had little or no production.

The numbers were also affected by a major writedown in reserves at the Sable Offshore Energy Project - the only producing gas site off Canada's East Coast.

More than 70 per cent of the gas wells drilled in 2003 were in shallow pools located in southern Alberta and Saskatchewan.

Although only 59 per cent of gas production was replaced last year, more gas was found in both Saskatchewan and B.C., where replacement rates were 261 per cent and 120 per cent, respectively.

"The exploration is pushing into the northern part of B.C. and I don't think that's a surprise to anybody," said Greg Stringham, CAPP's vice-president of markets.

Stringham said Alberta is turning into a "very large development play."

"A lot of the pools have been found, but they're getting the gas out of there better than they were in the past."

According to CAPP, Canada is the third largest natural gas producer in the world and by far the largest supplier of gas to the huge U.S. market.

But conventional supplies have been waning for several years now, forcing energy companies to drill more wells for less reserves, all the while searching for new gas pools in more remote and harder to access areas like northeastern B.C. and the Mackenzie Delta in the Northwest Territories.

"There's a little bit less proven reserves out there than there was the previous year and everyone knows that supplies are looking tight going forward," he said.

"This is just another piece of the puzzle that certainly could help sustain prices for the longer term here."

And the longer prices remain high for gas, it improves the economics of major new projects like the $7-billion proposed pipeline to ship gas southwards from the Canadian Arctic.

At least two new projects on Canada's East Coast are also moving ahead to build re-gassification terminals that would allow for imports from countries like Russia and Algeria to enter North America.

Another area that could boost Canada's gas reserves in the future is unconventional supplies like those found in coalbed methane, or gas caught in coal seams.

With numerous energy companies drilling for coalbed methane this year, Stringham expects companies to start booking the reserves for the first time. But because coalbed methane is still in its infancy in Canada, it's hard to say how big an impact that will have.

The CAPP report also said Canada's crude oil reserves rose slightly in 2003 to 12 billion barrels as more projects came on stream in the northern Alberta oilsands.

Oilsands now represent 61 per cent of Canada's total known oil reserves and that figure is expected to continue increasing in the future as a whole array of multi-billion dollar mining projects are built.